Investing in healthcare innovation

Sven Borho, manager of the £1.5bn Worldwide Healthcare Trust (LSE: WWH), had a cheering message for his mainly elderly audience at the recent annual general meeting. “The pursuit of the Holy Grail, an effective treatment for Alzheimer’s disease, is really heating up,” he said. That illustrates a key attraction of investing in healthcare. Not only do investors stand to make good returns, but they get to hear plenty of good news about their chances of a long, healthy and cognitive life.

“There are 5.7 million Americans diagnosed with Alzheimer’s – more than for all cancers – and it is the sixth leading cause of death, but billions have been wasted in research and development on failed programmes in the last 20 years,” said Borho. But that may be about to change, thanks to the clinical progress of drugs currently in trials. Leading the field is biotechnology company Biogen, WWH’s largest investment at 5.4% of the portfolio. Efficacy against markers for the disease has been proven, but now the challenge is to show cognitive benefit on a larger scale.

Why not more than 5.4%, given the huge potential market? First, because WWH also has 2.3% invested in Biogen’s partner, Eisai; second, because it is “high risk”;
and third, there are numerous other areas that could yield drugs with annual sales more than $10bn.

Spoilt for choice

In fact, Borho is spoilt for choice. To finance the 42% of the portfolio invested in areas such as medical technology, healthcare services and emerging markets (compared with 34% in the MSCI World Health Care index), and 33% in biotechnology (compared with 12%), the portfolio is light on broad-based pharmaceutical companies. There is no exposure, for example, to GlaxoSmithKline, Pfizer or Roche. “We are at the innovative end of the sector,” says Borho, “not in the big-cap dinosaurs.”

Elsewhere, Borho is optimistic. The larger biotechnology companies offer “compelling valuations” as well as growth from new product launches. Innovation has been “tremendous” in recent years. The regulatory environment in the US remains favourable following the administration’s decision to limit drug-price inflation through accelerated drug approvals rather than price controls.

Still, prices have collapsed for 90% of the prescription drugs market, thanks to the impact of generic manufacturers once patents have expired. Meanwhile, merger activity is poised to accelerate after tax reforms. Consequently, the fund is also leveraged, with 17% of net assets funded by debt.

A core holding for anyone

While modesty has never been a strong point for Borho or Sam Isaly, the manager until earlier this year, the fund’s record since its launch in 1995 with just £14m to invest shows why. The annualised 16.4% return since then is well ahead of all other investment trusts, while the five-year return of 163% is way ahead of both the healthcare and the general market indices, and well ahead of the nearest competitor. There is evidence of more sluggish recent performance but, as Borho points out, “the fund’s outperformance has never been in a straight line”.

Like the healthcare index, the fund is heavily focused on North America, which accounts for nearly 75% of assets, while Europe is just 9% and the UK zero. Given also the low exposure to the big pharma companies, the fund provides access to reasonably-priced growth stocks; few other UK-based funds can say the same. The shares trade on a small premium to asset value, but this should be a core holding in almost any investment portfolio. Although healthcare has trailed the performance of technology in recent years, a catch-up is overdue.

Activist watch

Activist investor Bill Ackman has spent the last few months buying up 15.2 million shares in Starbucks, a “so-far friendly bet that the coffee giant will recover from recent stumbles”, say Cara Lombardo and Julie Jargon in The Wall Street Journal.

Speaking at a recent investor conference, his first-such appearance in several months, Ackman blamed the recent slump in Starbucks shares on a slowdown in same-store sales growth (revenue generated by existing shops), a reduction in long-term growth targets, and leadership changes. However, he predicts the stock could more than double in price over the next three years, and is positive about the chain’s long-term prospects in China.

Short positions… BlackRock’s ethical ETFs

• Asset manager BlackRock will launch a range of exchange-traded funds (ETFs) which screen for environmental, social and governance factors, says Tom Eckett on Investment Week. They will exclude seven sectors, including controversial weapons, nuclear weapons, thermal coal, civilian firearms and tobacco, as well as all companies that violate the UN Global Compact principles. The range will invest according to six different MSCI indices: World, Japan, Emerging Markets, European Economic and Monetary Union, US and Europe, and will charge between 0.07% and 0.2% a year.

• Investment platform AJ Bell has published a list of the UK funds that have produced the “magical combination” of the most income, the best capital return and the highest combined total return over the past ten years. The overall winners were the Unicorn UK Income, MI Chelverton UK Equity Income, Montanaro UK Income and Royal London UK Equity Income funds. All delivered a total return over 200%, with the Chelverton fund producing the biggest (£10,000 turned into £41,000 over a decade). The Unicorn fund generated the largest income (£8,905 on a £10,000 investment over ten years).